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Life cycle of Outsourcing: A Conceptual study

This blog aims at looking at outsourcing from the perspective of its life cycle. An attempt to understand the birth and growth of this phenomenon called outsourcing. To start off, I would quote from wikipedia which has this to say (at the time of my visit to the site)

“Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of labor, capital, technology and resources”

The basis is that developing countries do have lower costs of living and many things which would sell at a premium (including labour) in a developed country would be outsourced to cut down on costs and a multitude of other reasons which could be discussed for days…I would sum up the very foundation of the phenomenon of outsourcing from nature principle of balance and the basic theory of economics which requires that demand increases when supply falls and vice versa.

Outsourcing is after all a system. It is a system of doing business (or is it just that?) To simplify matters, I assume it is merely a system and hence would apply the logic that it has its own stages of inception, growth, maturity and decline. The inception of outsourcing was from the need of developed countries to cut down on their costs (and other miscellaneous reasons) Upon reaching the level of saturation or maturity; even outsourcing has to die or fade away…Looking at the future of outsourcing when this would happen , I realize that there would rise a state where costs incurred for outsourcing are no longer commensurate with its benefits, where outsourcing would yield no benefits to the outsourcing unit.
All through this blog post I use the word “cut down costs” because this is the one which we very easily tend to associate with the concept of outsourcing. I do not wish to restrict the meaning of the term “cut down costs” to merely monetary expense but would wish to stretch the blanket over a wide plethora of benefits that outsourcing units receive from it (focussing on core competencies, global name a few)

To attempt to find out in which stage of its life cycle, outsourcing is in, would not be easy since like all concepts, the concept of the life cycle which I have attempted to present here is not perfect, is vague and abstract as well. However we could always look at what would happen in each one of the stages of outsourcing which would go a long way in understanding the language of outsourcing better.

At the inception of the system of outsourcing was the need for entities in developed countries to gain an advantage over their competitors. The potential outsourcing customers (just thought of a name to make look better than calling them entities “blandly”) had saturated the market (since the country was already at a developed stage) in order to go on, it had to work on three aspects. One, develop new markets; Two, work on value addition to the current markets; three, differentiate themselves from their competitors. We can see that outsourcing directly offered an option for the third aspect and indirectly contributed to the first and second one as well. The indirect contribution came from the fact that outsourcing created new jobs in developing countries, increased their standard of living and made them the new market for the potential outsourcing customer (actually, now their outsourcing customer). Post outsourcing, the outsourcing customer in the developed country was free to focus its attention on developing its core competencies providing value addition to the current markets and competitive advantage as well.

The subsequent stage is of growth which I personally think is where we stand is..I say this since maturity is a point in time whereas growth is a continous process and when we would have reached the point in time where maturity stands we would know that decline is just one step away. In this stage of growth, the outsourcing phenomenon branches out to different areas across the world, entering new areas in all spheres of business and trade. Potential outsourcing customers seek out newer and newer outsourcing service providers to create a competitive advantage. The stage of growth benefits many and increases the number of billionaires in the developing nations quite drastically. Forbes has this to say

Microsoft founder Bill Gates, the world’s richest man for 13 years, and his pal Warren Buffett, who holds the No. 2 spot despite enormous charitable donations, are quickly losing ground to Mexico’s most-monied man, Carlos Slim Helú. Helú’s net worth is up an astonishing $19 billion this year–the single biggest one-year gain in a decade–and is now just $7 billion shy of Gates and $3 billion less than Buffett. After a 20-year reign, Japan is no longer Asia’s top spot for billionaires: India has 36, worth a total of $191 billion, followed by Japan with 24, worth a combined $64 billion.
India’s rich are also marching toward the top of our rankings. Brothers Mukesh and Anil Ambani, who split up their family’s conglomerate in 2005, join Lakshmi Mittal, who heads the world’s biggest steel company, Arcelor Mittal, among the world’s 20 wealthiest. India now has three in the upper echelons, second only to the U.S.

For more on that, go here. So we see that outsourcing has in fact been a hugely equalizing factor, bringing in something which I started off this post with: balance.

Growth of outsourcing has seen phenomenal jumps and has lead to birth of even a few revolutionary systems such as “outsourced outsourcing”, wherein, the outsourcing service provider further outsources it to another provider and merely acts as the bridge between him and the end customer. We could just go on discussing what growth actually means, in positive and negative terms as well. One of the them would also be reason for reason for the birth of reproductive outsourcing and medical tourism. I do not wish to discuss on the conflict between ethics and business on this post. Growth also means that the customer finds newer and newer zones to get his tasks outsourced to.

The level of maturity is marked by a stage where outsourcing would be about to hit a stone wall and there would no longer be any economies in indulging in it. At this stage, most customers would look for other options to substitute for the fall in the power of outsourcing. They would have to come up with strategically important ideas which could take them further and save them from the decline. Customers who would fail to do so, would not be able to take their business further and would suffer defeat as well. Hence, we could assume safely that many customers would exit as this level and would not wait for the decline to come about.

Maturity would actually mean that benefits from outsourcing are no longer as good as they used to be. However, in the final stage of decline; outsourcing would indeed be a burden on the resources of the customer and he would have no option but to discontinue it. Although, the end of outsourcing is not something we can truly visualize now. The end of the system of outsourcing would not mean that many service providers and customers would be out of business. It simply would pave way to the inception of a new system which promises further benefits for everyone involved. We may prophesize that the decline would most probably coincide with the end of developing countries (when, they too would have become developed countries). But there is no such thing as true balance and it is merely an attempt to balance all the way and hence a new system would rise from the ashes of the old and it would change the future as we know it. (I did get a bit carried away with those words I guess…)

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